Draghi enters lion’s den to sell bond plan

European Central Bank president Mario Draghi faces a two-hour grilling from German lawmakers over his bond-buying plan.
Photo: AFP

European Central Bank President Mario Draghi faces a two-hour grilling on Wednesday from German lawmakers who fear his bond-buying plan to ease the region’s debt crisis could fuel inflation and undermine the ECB’s cherished independence.

Unveiled in early September, Draghi’s Outright Monetary Transactions (OMT) programme is designed to prop up wobbling euro states such as Spain by reducing their borrowing costs.

It has already contributed to an easing of the euro zone’s crippling three-year crisis, but German critics say it violates an ECB taboo on financing governments, taking the bank into dangerous new territory.

“What the ECB is doing at the moment has nothing to do with its mandate," said Klaus-Peter Willsch, a lawmaker from Angela Merkel’s Christian Democrats (CDU), who will attend Draghi’s closed-door appearance before members of the Finance, Budget and European affairs committees of the Bundestag.

“I want to hear from Mr Draghi how he can reconcile unlimited bond purchases with the bank’s price stability objective," said Willsch, a leading critic of Europe’s bailouts.

Draghi is not the first ECB president to appear in Germany’s lower house of parliament. His French predecessor Jean-Claude Trichet, along with former IMF chief Dominique Strauss-Kahn, briefed lawmakers in April 2010 on the details of the first financial bailout for Greece.

But the session, which will include 10-minute introductory remarks from Draghi followed by a lengthy Q&A and then short public statements from Draghi and Bundestag President Norbert Lammert, is a rarity.

The ECB was designed to be fully independent, and its president is not answerable to politicians. Wednesday’s briefing is only taking place because Draghi offered to explain his policies in Berlin after they triggered uproar at the end of the summer.

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His appearance underscores how important it is for him to keep politicians in Europe’s biggest economy on-side amid the broader German backlash.

Jens Weidmann, the head of Germany’s central bank, the Bundesbank, opposed his plan, as did Germany’s conservative media. One ally of Merkel’s dismissed Draghi as a “Falschmuenzer", or forger, after he went public with OMT.

UNANSWERED QUESTIONS

The exchanges are likely to be more polite on Wednesday. Merkel, many of her conservative allies and opposition parties like the Social Democrats (SPD) and Greens have voiced support for the Italian ECB chief’s programme, but there are still many unanswered questions he will be pressed on.

“Mr. Draghi has made clear that bond purchases can only take place under certain conditions," said Priska Hinz, a budget expert for the Greens. “We will want to know what kind of aid programme and conditionality he sees as prerequisites."

This is crucial for Spain, which has resisted putting in a formal request for state aid, in part because of concerns it will be forced to put in place painful new economic reforms in exchange.

Many of Merkel’s allies are resistant to a Spanish rescue because they fear it would trigger “unlimited" bond buys by Draghi’s ECB.

“I expect the big questions to be about Spain," said Guntram Wolff, deputy director of the Brussels-based Bruegel think-tank and a former Bundesbank economist.

“There is a lot of opposition to a programme for Spain. They are against it because they fear it would open the floodgates at the ECB. The concerns run very deep, also in the SPD."

Norbert Barthle, a budget expert for Merkel’s CDU, said his colleagues were also likely to press Draghi about plans to give the ECB new responsibilities for supervising banks across Europe. Many lawmakers want assurances that this will not interfere with the bank’s core monetary policy task.

But amid the concerns, there was general agreement that Draghi had done the right thing in offering to explain his policies at a time when many citizens in Europe feel momentous decisions are being taken without their input.

“One of the big problems of Europe is that European institutions only talk to voters through national governments," said Wolff. “So it’s important to have a direct link to the people, and this is a step in that direction."